The Financial Sector Conduct Authority (FSCA) recently published a draft exemption applicable to FSPs, Key Individuals and Representatives that render financial services in respect of credit life products and funeral products.
Background and context
In 2017, new classes and sub-classes of insurance business were introduced through the Insurance Act. In 2020, the Determination of Fit and Proper Requirements for Financial Services Providers was amended to ensure alignment between the subcategories of financial products contained in the Fit and Proper Requirements and the new classes and sub-classes of insurance business under the Insurance Act. However, it was recently identified that some of the reclassification that took place under the Insurance Act inadvertently resulted in certain complications in the context of the Fit and Proper Requirements.
FSCA Communication 3 of 2021 (FAIS) sets out the complications identified as follows:
Credit Life Products
- Prior to the Insurance Act, credit life type products could be written under the Short- term Insurance Act, 1998 (STIA) i.e. as short-term insurance policies. Credit life type products that were written under the STIA were classified in the Fit and Proper Requirements under the short-term Insurance: personal lines subcategory. All credit life products written under the Long-term Insurance Act, 1998 (LTIA) were classified in the Fit and Proper Requirements under long-term insurance subcategory B1 (if only risk benefits were provided) or long-term insurance subcategory B2 (if risk benefits were provided in conjunction with a guaranteed investment value or a materially equivalent value).
- With the advent of the Insurance Act, credit life insurance products were no longer classified under the short-term insurance/non-life insurance classes and had to be written under Credit Life Class (which falls under life insurance).
- Before the Insurance Act, where FSP’s and representatives were rendering financial services in relation to credit life products written under the STIA, and key individuals were managing and overseeing the rendering of such financial services, they were licensed to operate under the short-term insurance: personal lines subcategory in terms of the Fit and Proper Requirements.
- In instances where such FSP’s representatives and key individuals were not also authorised to operate under the long-term insurance B1 or B2 subcategories, the change in the Insurance Act relating to the reclassification of credit life policies inadvertently resulted in a situation where such FSP’s, representatives and key individuals are no longer authorised for the correct FAIS subcategory when rendering financial services in respect of credit life products, or managing and overseeing the rendering of such services (i.e. their authorisation for short-term insurance personal lines is no longer appropriate and they need to be authorised for long-term insurance subcategory B1 or B2).
Funeral products
- Prior to the Insurance Act, funeral products below R30 000 were written under the assistance business “class” in the LTIA and funeral products above R30 000 were written under the life insurance “class” under the LTIA.
- Funeral products that were written under the assistance business “class” under the LTIA were classified as long-term insurance subcategory A under the Fit and Proper Requirements, whilst funeral products that were written under the life insurance “class” under the LTIA were classified as long-term insurance subcategory B1.
- With the advent of the Insurance Act, all funeral products below R100 000 now fall within the Funeral Class in the Insurance Act.
- Before the Insurance Act, where FSP’s and representatives were rendering financial services in relation to funeral products offering policy benefits between R30 000 and R100 000, and key individuals were managing and overseeing the rendering of such financial services, they were licensed to operate under long-term insurance subcategory B1.
- In instances where such FSP’s, representatives and key individuals were not also authorised to operate under long-term insurance subcategory A, the change in the Insurance Act relating to the reclassification of funeral products inadvertently resulted in a situation where such FSP’s, representatives and key individuals are no longer authorised for the correct FAIS subcategory when rendering financial services in respect of funeral products, or managing and overseeing the rendering of such services (i.e. their authorisation for long-term subcategory B1 is no longer appropriate and they need to be authorised for long-term insurance subcategory A).
Consequences of reclassification
The effect of the above is that certain FSPs are not authorised to render financial services in respect of the reclassified subcategories of financial products. Consequently, such FSPs, their key individuals and representatives also do not comply with some of the competence requirements applicable to the relevant subcategories of financial products.
The FSCA is of the view that the above complications created by the reclassifications introduced through the Insurance Act and subsequent amendments to the Fit and Proper Requirements were unintentional and must not result in undue prejudice to the affected persons.
As such, the FSCA has decided to afford a temporary dispensation to all affected persons in order to facilitate and ensure a fair transition to the new classification of financial products as set out in the draft exemption. As these complications manifested when insurers were converted to licences under the Insurance Act, this exemption will have retrospective effect and be applicable from 1 July 2020.
Interested parties are invited to submit comments on the draft exemption to the FSCA using the Comments Template by 10 March 2021 at FSCA.RFDstandards@fsca.co.za
To download and read the related documents, click on the links below: